The big value of this book, by a former Wall Street insider, is that
it reminds us that the Collapse of 2008-? was not something caused by
an impersonal system. The Collapse and subsequent bailouts were caused
by individuals acting in their rational self-interest. Prins has
collected hundreds of individual stories and backed them up with
references.

Back in 2009, a cousin argued that Wall Street had blown up because
people were greedy. I replied that he would have done exactly the same
as the Wall Street looters. He was outraged. I asked "What if you
could flip a coin and, if it came up heads you'd earn $1 billion for
your employer [an animation studio] and take home $500 million of that
as a bonus. But if it came up tails, you'd bankrupt the studio and
have to find another job. Would you flip the coin?" Of course not! He
was offended by the very idea. I pressed him, though. "How could you
deny your family the opportunity to gain $500 million, simply out of a
selfish desire to keep your current job?"

We set up the rules for Wall Street traders and executives just like
the hypothetical that I gave my cousin. Any rational person in their
situation would have behaved as they did. Prins, in
It Takes a Pillage,
gives us the specifics, starting off with the big picture:

(from page 3) Washington has collectively and in a bipartisan manner
demonstrated the most knee-jerk and expensive approach to groping
toward financial stability in human history. ... The strategy that
[Tim Geithner unveiled on March 23, 2009] to "fix" the financial
system was to ask its most reckless and opaque companies--the ones
that shirked the most taxes and took the most selfish and
irresponsible risks--to buy up Wall Street's junkiest assets in order
to rid the system of its own clutter. The worst part? The government
would front them most of the money to do it.

Quantifying the Scale of the Bailout

Prins has worked hard to quantify the scale of the transfer of
taxpayer funds to favored Wall Street banks and a handful of bank-like
firms. She maintains a
continuously updated calculation on her Web site. As of December
2009, the number stood at 11.5 trillion dollars, plus another $2
trillion. Her analysis is unconventional in that it takes into account
the government assumption of Fannie Mae liabilities, for example.

The same page also
includes "The Pillage People", tallying up how much various government
officials have handed out, and a compensation overview, comparing
total bank employee compensation to total federal subsidies (for
2009, she has the banks paying out $124 billion and receiving $116
billion in subsidies).

On page 43, Prins points out that there were only $1.4 trillion in
subprime mortgages outstanding in the U.S. and $11.9 trillion of total
residential mortgages, so the only explanation for why so much money
was needed was leverage. Her explanation of how exactly leverage was
used is confusing. She provides a bit better explanation of the credit
default swap market, which grew to $45 trillion: "In an incentuous
frenzy, institutions bought and sold credit protection to one another,
with money they borrowed from one another. ... The global fallout
might have been manageable if banks hadn't entered this massively
interconnected circle of privately negotiated CDSs." AIG, of course,
was the biggest bailout recipient and the biggest seller of
CDSs. Prins quotes a Deutsche Bank executive who "saw that pay
incentives and lack of oversight from management had led to excessive
risk taking [in 2006]." He explained that "the employees writing and
signing off on the contracts get paid in the short term..."

The book has the details of how the money was spent, but it does not
clarify the picture. For example, page 34 talks about a February 2009
House hearing in which it was established that for the first $254 billion
spent under TARP, the government received assets worth only $176
billion. Prins does not explain how the value of the assets was
established. On page 35 we learn that Treasury got a much worse deal
when it put TARP money into Goldman than did Warren Buffett, at
roughly the same time.

Page 41 treats Timothy Geithner's arrival as Treasury
Secretary. "Geithner had the option of coming up with a different plan
to stabilize the banking system, rather than purchasing shares in its
unwieldy firms. ... He went back to Paulson's original plan of buying
up toxic assets, with a twist. Under Geithner's public-private
partnership plan, we the people wouldn't buy the assets directly and
hope that they have value someday. We would be asked to loan money to
private firms to buy them for us--up to $1 trillion worth. If the
assets have value later, those private firms will make most of the
profit on them. And if they don't? Well, then we're out another
trillion or so."

Much of the money doled out was to Wall Street investment banks but
from programs intended to stabilize Main Street banks. The lines were
blurry ever since the Clinton-era repeal of Glass-Steagall and all of
the Wall Street I-banks darted over the line to become "bank holding
companies". Prins notes that this gave "Morgan Stanley and Goldman
Sachs easy access to massive lines of credit [with the Fed]. For those
of you keeping score at home: change of status equaled river of free
money." The Wall Street Journal said that "Wall Street's two most
prestigious institutions will come under the close superivision of
national bank regulators, subjecting them to new capital requirements,
additional oversight, and far less profitability than they have
historically enjoyed." [This turned out to be wrong; 2009, with its
river of free money, was the most profitable year ever for Goldman
Sachs.] The mechanism is explained on page 112: "the Fed used a
sleight of hand it had honed for decades to take on trillions of
dollars in useless assets, giving cheap loans in return to the very
banks that had created the bad assets."

American Express decided that it too was a bank and could dip its toe
into the river of free money. The CEO Kenneth Chenault said "Given the
continued volatility in the financial markets we want to be best
positioned to take advantage of the various programs the
U.S. government has introduced or may introduce." Chenault's friends
on the Amex board paid him $26 million in 2007. In 2008, a terrible
year for shareholders, he received $27 million, just as the river of
public money began to flow into Amex. GMAC became a bank as well,
part of the $97 billion in public money consumed by GM and Chrysler.

What's the latest on these programs? According to CNN,
January 26, 2010, the TARP program per se may not cost that
much. The Wall Street banks are going to repay the money. AIG will
cost $9 billion. GM and Chrysler are the black holes from which almost
none of the $97 billion in public funds will emerge. As Prins points
out in the book, however, TARP is really the cheapest of the
programs. Giving banks money at zero percent interest is the costliest
program and there is virtually no accountability.

Goldman, Goldman, Goldman

Having worked at Goldman, Prins devotes a lot of attention to how this
company has managed to obtain favorable treatment from an all-powerful
federal government. The near-infinite supply of tax dollars and truly
infinite supply of dollars that can be printed makes today's federal
government the most important ally in any business.

When the Collapse of 2008 began, Goldman was positioned well due to
its former CEO, Hank Paulson, being Secretary of the Treasury. Prins
notes that Paulson had cashed out his Goldman stock, worth
approximately $500 million, upon taking the Treasury post in 2006 and
was able to indefinitely defer $100 million in capital gains taxes on
the transaction as one of the perks of the new job. Paulson was
involved in negotiations concerning whether his former competitor,
Lehman Brothers, should be allowed to go broke. Prins describes
Paulson's first proposal that TARP funds be used to buy worthless
assets: "His friends made a series of bad bets, and now he wanted the
government to cover their losses. What could be simpler?"

Page 198: "[Geithner] appointed Mark Patterson, a former Goldman Sachs
lobbyist, as chief of staff at the Treasury. ... Patterson got the
prime spot in the Treasury through a glaring loophole in the executive
order on lobbyists that President Obama had issued a week earlier."

As of the summer 2009 writing of the book, Goldman had returned $10
billion in TARP money, but kept "$12.9 billion they got from the AIG
bailout, the almost $30 billion of cheap debt they raised under the
Temporary Liquidity Guarantee Program (TLGP), and the approximately
$11 billion they still have available under the Fed's Commecial Paper
Funding Facility LLC (CPFF)."

[In 2003, Goldman paid a fine to the SEC for defrauding investors by
having its analysts hype stocks that it knew to be worthless, but from
whose sale Goldman stood to profit handsomely.]

Why the bailout didn't work

Politicians are already congratulating themselves on a couple of
quarters of GDP growth and saying "imagine how much worse it would
have been if we hadn't bailed out those banks." For young people
worried about working for a lifetime to repay debts incurred by the
Congress in 2008, 2009, and 2010, or for those unable to find work,
those congratulations will ring hollow. Prins explains why the bank
bailout did not help the economy.

Early in the book, Prins decries the fact that the bailouts of 2008/09
were not provided directly to consumers for auto, home, and student
loans. She then explains that changes in Fed policy encouraged banks
to sit on their money by paying them extra interest on money parked
with the Fed. "American banks kept $44 billion in reserves with the
Fed. By the end of 2008, that number soared to $821 billion. And by
May 2009, it hovered just below $1 trillion."

The unemployment numbers aren't nearly as bad as in the Great
Depression, but a lot of that is because we've changed the way that we
calculate unemployment. On page 135 Prins notes that "In 1933, at the
peak of the four-year depression, around 1,000 homes were foreclosed
every day. ... By comparison, 10,000 homes were foreclosed daily by
early 2009." The population has grown since 1933, of course, but not
tenfold.

The Ratings Agencies

Prins and her researchers tried to get information out of the ratings
agencies, Standard and Poor's, Moody's, and Fitch. These were the
folks who rated so many of the subprime-based products "AAA" in
exchange for fees from the banks issuing those products. "If the
agencies did not provide good scores, CDOs weren't created, and the
agencies wouldn't get paid." The agencies refused to divulge how much
they were typically paid by the investment banks. Prins suggests that
they be nationalized.

Citigroup

In some ways the entire Collapse of 2008-? may be due to
Citigroup. "In July 1999, Robert Rubin abruptly left the Beltway at
the height of his prestige. On the day he resigned, after four years
as Bill Clinton's treasury secretary, ... [Rubin said]: "This has been
a remarkable experience, but I was ready to go, ready to return to New
York.' He said that he had 'only some very vague plans about what to
do next.' [In November 1999] Rubin's plan really sharpened when he
nabbed a plum spot at Citigroup. His appointment there happened to
come a few days after Congress and the Clinton Administration agreed
on the most massive piece of banking and financial deregulation in the
country's history, the repeal of Glass-Steagall. ... Citigroup was the
big winner in the legislation. ... Rubin himself said that he played a
role in ironing out the bill's final version." Rubin took home $126
million from Citigroup over the next decade, according to Prins
(sourced with one of the book's 1000 or so citations).

"Rubin placed a well-time phone call on November 8, 2001, a month
before Enron's bankruptcy, to one of his pals in Washington,
undersecretary Peter Fisher, who had been at the New York Fed while
Rubin was the treasury secretary. He asked Fisher to call the ratings
agencies on behalf of Enron [to persuade the agencies not to downgrade
Enron]. Fisher declined. Enron's pending merger with Dynergy
disintegrated, Citigroup lost the deal, and Enron filed for bankruptcy
a month later--leaving Citigroup with lots of unpaid debts." Prins
explains that this lobbying was legal "only because Bill Clinton, as
one of his last acts as president, canceled an executive order that
had prohibited officials from lobbying their own political stomping
grounds on behalf of the private sector for five years after leaving
office."

On page 39 we learn that because of the substantial assistance that
Citigroup provided to Enron in running its off-book entities, the bank
was required to file special quarterly risk-management reports with
the New York Fed. "The Fed ended that requirement about the time that
Citigroup started bulking up on its own off-book hiding spots, called
structured investment vehicles (SIVs)."

[In 2003 Citigroup settled charges brought by the SEC that it helped
defraud Enron investors. Separately, Citigroup had to pay a fine for
its role in defrauding investors by having its stock analysts provide
inflated ratings to companies that it knew were unsound (more at Washington
Post).]

Merrill Lynch

Merrill Lynch is renowned for collecting $10 billion in government aid
and then paying out $3.6 billion of that in bonuses to the employees
who had wiped out shareholders in a nearly century-old firm. The back
story on Merrill is more interesting, however, than the public outrage
concerning the bonuses.

I wrote about Stanley O'Neal at Merrill in this
April 2008 blog posting. He destroyed a firm that was nearly a
century old by placing huge bets on mortgage-backed securities. He
transferred about $50 million per year of the shareholders' money into
his personal checking account. Prins notes that he took another $161
million as a retirement gift when the Board finally threw him out,
just about a year before Merrill went bust. Prins notes that O'Neal
endured only three months of unemployment. He landed a job as a
director on the board of Alcoa, approving the compensation of its
executives.

Merrill's board hired a Goldman alumnus, John Thain, to replace
O'Neal. He "topped the chart [of Wall Street pay for 2007], having
worked for only one month", taking home $83 million (an annualized
salary of $1 billion).

Merrill's poorly understood and catastrophic losses nearly brought
down Bank of America, but not its employees. The chief risk officer,
Amy Wood Brinkley, lost her job at Bank of America, but not before
taking home $37 million of the shareholders' money. She was replaced
by "Greg Curl who, ironically, was the lead negotiator for the Merrill
acquisition."

[In 2003, Merrill paid a fine to the SEC for defrauding investors by
having its analysts hype stocks that it knew to be worthless, but from
whose sale Merrill stood to profit handsomely.]

Things we didn't know about the Fed

Prins has a chapter entitled "We Already Have a Bad Bank: It's Called
the Federal Reserve".

Page 124 explains that "member banks are required to subscribe to
stock in their district's Federal Reserve Bank. The required
subscription is equal to 6 percent of the bank's capital and surplus;
3 percent must be paid in. ... Member banks also receive 6 percent
dividends on their shares, not too shabby in times of stock market
turmoil, when no bank offers that to individual shareholders."

Prins ends the chapter with the following:

Big convoluted institutions drained trillions of dollars of public
capital and wrecked the general economy. yet they are destined to
remain financial mammoths because the Fed wouldn't let them go
extinct. ... The Fed did an abysmal job of guarding the nation from
Wall Street's excesses as they were building, and rather than admit or
correct its errors, the Fed simply printed more money, in the hopes of
shoving them under the rug. Yet both the Bush and the Obama
administrations wanted to give the Fed more power as a systemic risk
regulator. What does that say about the likelihood that all this will
happen again?

Politicians

Aside from the expected campaign contributions from Wall Street, some
politicians received more direct aid. On page 163, Prins says that
Countrywide, whose CEO took roughly $500 million out of the firm
before it blew up, extended "favorable" loans to "high-ranking
government officials, including Chris Dodd (D-CT) and Kent Conrad
(D-ND), plus a slew of former Fannie Mae CEOs." Dodd remained chairman
of the Senate Committee on Banking, Housing, and Urban Affairs; Conrad
remained chairman of the Senate Budget Committee.

Employees versus Investors

Page 105: "Former Bear Stearns CEO James Cayne sold his Bear
stock--just two days after the [takeover by JP Morgan Chase] was
completed--for $61 million. ... Most of that stock had been given to
Cayne as part of his compensation package." Investors in the stock did
not do so well. They paid as much as $140 per share and sold for $10,
though even most of that was a gift from the taxpayer; JP Morgan Chase
only bought the company because the government guaranteed Bear's
losses with $29 billion in public funds.

Page 161: the AIG shareholders took a beating due to a $5 billion loss
in Q4 2007, but CEO Richard Sullivan was rewarded with a $5 million
bonus.

Page 166: Dick Fuld, who bankrupted Lehman, corrected reports that
he'd taken $500 million out of the firm before its collapse. It was
"somewhere near" $350 million. Public investors lost everything.

Page 190: One of the chief architects of the ruin of AIG shareholders
(and then the taxpayers), AIG chief financial officer Joseph Cassano
collected $315 million in pay while leading the firm into the credit
default swap (CDS) market. In August 2007, he said "It is hard for us,
and without being flippant, to even see a scenario within any kind of
realm of reason that would see us losing $1 in any of those
transactions." In March 2008, he was forced into retirement. In
September 2008, AIG became insolvent. Cassano was a 53-year-old
retiree with a $315 million nest egg. AIG lost more in one year than
all of the paper profits that it had declared during its nearly
100-year history (those paper profits were the basis of the big
executive bonuses); approximately $180 billion in taxpayer money was
required to prop up AIG.

It will happen again pretty soon

On page 79, Prins says "The Federal Reserve and the Office of Thrift
Supervision ... created an unstable environment in which more players
needed to be watched. By not considering the consequences of their
approvals, they allowed financial firms to easily become bank holding
companies and insurance companies to become savings and loans ... AIG
became one of the most extensive and complex S&Ls, and would
ultimately conspire with its regulators to extort hundreds of billions
of dollars of public money. That's a recipe for future disasters. So
the stage is set for more government bailouts because any financial
firms left standing, particularly those that have the
government-sponsored stamps "BHC" and "FHC" will be able to engage in
every single one of the behaviors that led to the Second Great Bank
Depression ["Collapse of 2008-?" as I call it], even while being
floated by government (read: public) money."

On page 141, Prins sings the praises of Glass-Steagall: "If it had not
been repealed a decade ago, our current banking system meltdown would
not have occurred. Deposits and loans would not have been used as
collateral for an upside-down pyramid of risky securities." Senator
Byron Dorgan, in 1999, said "I think we will look back in ten years'
time and say we should not have done this but we did because we forgot
the lessons of the past and that that which is true in the 1930s is
true in 2010." He was only off by two years! The late Senator Paul
Wellstone said "[Glass-Steagall] was designed to prevent a handful of
powerful financial conglomerates from holding the rest of the economy
hostage."

Surveying the wreckage of 2009, Bill Clinton had no regrets, as quoted
by Prins. "[Repeal of Glass-Steagall] enabled them to, like the Bank
of America, to buy Merrill Lynch here without a hitch. And I think
that helped to stabilize the situation." Prins points out that
Merrill's losses were so great that Bank of America needed $220
billion in capital and guarantees following the merger.

Prins discusses another little-known relatively recent destabilizing
factor: starting in 2004, investment banks were allowed by the SEC to
"increase their official leverage from twelve to one to thirty to
one". In the case of Merrill, the Bush Administration SEC allowed them
to go to 40:1.

Prins does not spend much ink on the fact that a publicly traded
investment bank is a relatively new phenomenon. This
New Yorker article explains that until 1970 the NYSE prohibited
investment banks from going public. The I-banks went public in waves,
culminating with the Goldman Sachs IPO in 1999. Prior to their public
offerings, the executives were partners risking their own money and
had a natural incentive to monitor risk. Following the public
offering, the executives were risking their investors' money and, at
worst, might have to find new jobs if they placed bad bets.

So... we gave everyone on Wall Street a totally different way of
working, starting in the 1970s (from risking their own money to
risking shareholder money and skimming off the proceeds from lucky
bets). We made a huge change in 1999 by repealing Glass-Steagall and a
big change in 2004 by upping leverage limits. Our economy melted down
in 2008. It shouldn't be tough to undo these changes, right? Prins
says "Washington is masterful at conducting lengthy, painful debates
over minutiae, which sap the country's hope--not to mention the
federal budget--and also distract us from undertaking more essential
action on the profound structural problems. Expensive piecemeal
remedies aimed at solving the financial system's total failure have
continued through the Bush and Obama administrations."

Remedies from Prin

In the final chapter of the book, Prins adds a little scorn to what
she has already heaped on the Obama Administration. Obama talks about
change, she says, but has only intensified the problems caused by
previous administrations. The Clinton Administration repeal of the
Glass-Steagall act is mourned yet again. Congress and Clinton allowed
investment banks to engage in commercial banking starting in 1999 and
we made it almost 10 years before a complete Great Depression-style
meltdown. In addition to restoring Glass-Steagall, Prins suggests the
following:

prevent firms from parking risk off the books in structured
investment vehicles (SIVs; made famous by Enron and then adopted all
over Wall Street)

don't let investment banks become bank holding companies where
they have access to bailout money and nearly free loans from the
Federal Reserve

break up big banks and don't buy toxic assets from anyone

regulate banks much more strictly (she doesn't exactly say how)

don't capitalize banks you can't understand; i.e., if the bank
CEO says the bank went insolvent because top executives couldn't
understand the combined risk of all of their bets, don't put taxpayer
money into the quagmire

audit and scale back the Fed

I don't think that she has made her case for regulatory reform. First,
she has not sketched it in sufficient detail. Second, the collapse was
not a failure of a free market. In a classical free market, the
participants are subject to upside and downside risk. A Wall Street
partnership that made a bad bet would find itself wiped out and its
partners' mansions in Greenwich would be taken by counterparties. The
government created the corporation so that a group of guys could take
risks every day on Wall Street, pay out the profits to themselves as
salary, and then, if a day came when there was a big loss, hand over
the corporate shell to the counterparties and retire to their
mansions. Then the government created the public corporation, in which
Wall Streeters could take money from investors, place bets with it,
take home the profits from winning bets as "bonus" and, once again,
hand over a bankrupt shell when big bets went sour. SEC regulation
would prevent the shareholders of a public company from having any
meaningful way to control the diversion of profits away from the
dividend stream that they expected and into employees' pockets.

Given the public corporation structure of Wall Street banks, the
relevant question is not why they blew up but why it took so long.

Remedies from Greenspun

In my economic recovery
plan, I suggested that shareholders in public companies select and
elect an independent board to represent their interests. I wrote this
primarily with non-financial companies in mind, to keep the executives
from packing the board with their golfing buddies and then looting
from the shareholders. It is perhaps even more important for a Wall
Street bank because when the bank is fully looted out the consequence
seems to be that the taxpayer must step in to stop a system-wide
panic.

In "Would someone please save shareholders from being helped by the government pay czar?" (October 2009)
I proposed a general prohibition on public companies issuing new stock
(diluting existing investors) to pay employees. They should have to
use profits to buy back stock and then hold it in escrow for
employees, along with some cash. If the company were still profitable
five years down the road, the stock and cash could be released to the
employees who'd demonstrably generated some long-term value. If the
company were flailing, it could use the escrowed stock and cash to
recover.